This year I have heard a lot of new traders make comments to the effect that “stocks aren’t very good to trade”. They say that “stocks don’t trend very well” or “they go sideways a lot”.

When I ask what they are basing this on, they generally point to a chart of the ASX 200 index (XJO in ProfitSource), which tracks the performance of the top 200 stocks in the Australian share market. The ASX 200 price action for 2012 is reproduced in Chart 1 below:

Chart 1

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At first glance, they seem to be on to something, as the ASX 200 has been trading in a range of a little over 500 points throughout 2012. But if we take a step back and look at the bigger picture, we see a very different story. This can be seen in Chart 2 below, which covers the ASX 200 from the March, 2003 bear market low:

Chart 2

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Australian stocks more than doubled in value during a very strong upward trend (bull market) from 2003 to 2007. Then, from November, 2007 to March, 2009, prices more than halved in a very strong downward trend (bear market).

It’s not that stocks are in a sideways-moving or non-trending market. It is just that new traders have come into trading at a time when Australian stocks are not trending as strongly as they have previously.

When I first started trading stocks using CFDs around 2005, we were in the middle of a very strong bull market. My first impression was that stocks were wonderful to trade and that a lot of money could be made. That is still my position today, as long as traders focus on trending markets.

Let’s contrast this with the currency markets. Currency markets have a reputation for being fast moving and for making strong, consistent trends. This is backed up by a recent chart of the Euro/US Dollar currency pair, (FXEUUS in ProfitSource) as shown in Chart 3 below:

Chart 3

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Since 2007, the Euro has essentially been making either a strong upward trend or a strong downward trend. To new traders frustrated by slow moving stocks, this can look very appealing. It can also give the false impression that currencies trend well and stocks don’t.

The reality is that all markets have bullish cycles, bearish cycles and periods of sideways movement. Interestingly, my first impression of the Euro/US Dollar pair in 2006 was that it was a sideways moving currency, as illustrated in Chart 4 below:

Chart 4

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The lesson here is not to rush to judgment on a market. Take the time to study its history. Go back not just over a few days or weeks or months or even a year. Go back over as much history as you can find.

David Bowden, founder of Safety in the Market, taught that in order to successfully forecast a financial market, a trader must “know their market like a cow knows its calf.”

This cannot be done on first impressions. It requires time and effort.

An excellent way to get to know a market is to study all the times your market (whether it be a stock, a currency, a commodity, an interest rate product or a stock index) has made an upward trend. Then study all the times your market has made a downward trend. Then look at how often your market has gone sideways.

This can generally be done over a single weekend. Those who are willing to take the time to study are more likely to be rewarded in the market.

Be Prepared!

Mathew Barnes